Professional Documents
Culture Documents
2-1
Introduction
Introduction to
to Financial
Financial Statements
Statements
Companies prepare interim
financial statements and annual
financial statements.
2000
X
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Slide
2-3
Introduction
Introduction to
to Financial
Financial Statements
Statements
Also
Alsocalled
calledStatement
Statement
Balance Sheet of
of Financial
FinancialPosition
Position Three primary
Income Statement
financial
statements.
Statement of Cash Flows
We will use a corporation
to describe these
statements.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Describes
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Revenues Expenses
result in result in
positive negative
cash flow. cash flow.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Net income (or
net loss) is
Statement of Cash Flows simply the
difference
between
revenues and
expenses.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
The
The Concept
Concept of
of the
the Business
Business Entity
Entity
A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
A
A Starting
Starting Point:
Point: Statement
Statement of
2-10
of
Financial
Financial Position
Position
Vagabond Travel Agency
Statement of Financial Position
December 31, 2002
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Assets
Assets
Vagabond Travel Agency
Statement of Financial Position
December 31, 2002
Assets Liabilities & Owners' Equity
Cash Assets are
$ 22,500 Liabilities:
Notes receivable 10,000 economic resources
Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 that are owned by
Salaries payable 3,000
Land
Building
100,000
the business and
Total liabilities
90,000 Owners' Equity:
$ 80,000
Assets
Assets
Cost Principle
These accounting
Stable-Dollar principles support Going-Concern
Assumption cost as the basis Assumption
for asset valuation.
Objectivity
Principle
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Slide
2-13
Liabilities
Liabilities
Vagabond Travel Agency
Statement of Financial Position
December 31, 2002
Assets Liabilities & Owners' Equity
CashLiabilities are $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
financial
Accounts receivable 60,500 Accounts payable 36,000
obligations that
Supplies
Land
2,000
100,000
Salaries payable
Total liabilities
3,000
$ 80,000
represent negative
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
future cash flows Retained earnings 70,000
for the enterprise.
Total $ 300,000 Total $ 300,000
Owners’
Owners’ Equity
Equity
Vagabond Travel Agency
Statement of Financial Position
December 31, 2002
Assets Liabilities & Owners' Equity
Cash Owners’ equity $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
represents the
Accounts receivable 60,500 Accounts payable 36,000
Land
owner’s claims to
Supplies 2,000
100,000
Salaries payable
Total liabilities
3,000
$ 80,000
the assets of the
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
business. Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Owners’
Owners’ Equity
Equity
Changes in Owners’
Equity
•Owners’ •Payments
Investments to Owners
•Business •Business
Earnings Losses
The
The Accounting
Accounting Equation
Equation
Assets
Assets ==Vagabond
Liabilities ++ Agency
Travel
Liabilities Owners’
Owners’ Equity
Equity
Statement of Financial Position
December 31, 2002
$300,000
Assets=
$300,000 = $80,000
$80,000 +Liabilities
+ $220,000
$220,000
& Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Let’s analyze
some
transactions for
JJ’s Lawn Care
Service.
Jill realized she had purchased more repair parts than needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for
$150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.
Investments
Investments by by and
and payments
payments to to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Slide
2-30 JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 $ 4,125
Relationships
Relationships Among
Among Financial
2-34
Financial
Statements
Statements
Beginning End of
of period Time period
Balance Balance
Sheet Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Slide
2-35
Forms
Forms of
of Business
Business Organizations
Organizations
Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship
Reporting
Reporting Ownership
Ownership Equity
Equity in
in the
2-36
the
Balance
Balance Sheet
Sheet
Sole Ow ner's equity:
Sole
Proprietorship
Proprietorship Jill Jones, capital $ 8,000
Partners' equity
Jill Jones, capital $ 4,000
Partnership
Partnership Bill Jones, capital 4,000
Total partners' equity $ 8,000
Owners' equity
Capital stock $ 7,000
Corporation
Corporation Retained earnings 1,000
Total stockholders' equity $ 8,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Slide
The
The Use
Use of
of Financial
Financial Statements
Statements by
2-37
by
Outsiders
Outsiders
Two
Two concerns:
concerns:
Creditors Liquidity
Liquidity
Profitability
Profitability
Investors
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Slide
2-38
The
The Need
Need for
for Adequate
Adequate Disclosure
Disclosure
Balance Sheet Notes
Notes to
to the
the
Income Statement
financial
financial
statements
statements often
often
Statement of Cash Flows
provide
provide facts
facts
necessary
necessary forfor the
the
proper
proper
interpretation
interpretation of of
the
the statements.
statements.
End
End of
of Chapter
Chapter 22